Thoughts on China's 5-Year Plan

Wen Jiabao has announced China’s next five-year economic plan. It’s positive sounding, but tough to implement.

By Alistair Thornton for The Diplomat

March 06, 2011

Following is a guest entry by Alistair Thornton, China analyst for IHS Global Insight, on the next five-year plan.

In general, this is a positive looking plan. The targets and lofty rhetoric reflect – from our point of view – an accurate assessment of the state of the economy. Prefacing the targets, Premier Wen Jiabao reiterated his long-held belief that the economic structure isn’t ‘well-balanced, coordinated or sustainable.’ Broadly speaking, the targets seek to re-tool the economy, slowing things down slightly in order to enact necessary structural changes. Primarily, consumption needs to rise as a share of GDP. There’s an emphasis on shifting to a healthier type of economic growth, focusing on the quality of growth, rather than just the quantity. This is intended, as Wen put it so nicely, to not just grow the pie itself, but share it around more fairly. It’s also intended to take environmental concerns into consideration.

The first thing to note is that previous plans have pushed in similar directions, to little avail. They sailed past the growth target of 7.5 percent for the 11th Five-Year Plan, whilst President Hu Jintao's whole emphasis on a 'harmonious society' (that is, addressing widening inequalities) has come to little. So, in this respect, the Plan is useful in that it tells us the direction that the government wants to push, but it’s far from certain that this is where they will actually end up.

That said, there does seem to be a growing consensus that this time it really has to be different. The economic crisis drove home the fact that, as it stands, the economy is fundamentally unsustainable, and we feel that this time, there will at least be more effort spent in reaching the targets.

Whether rhetoric and attractive targets can be turned into something of substance, however, is quite another thing. First, given the increasing pluralisation of governance in China, it’s getting harder for reform-minded individuals to push through necessary but painful changes. Indeed, even if there was a strong consensus amongst the ruling elite – which, like everywhere in the world, there surely isn't – politically powerful vested interests are sure to attempt to stymie things.

Complicating this picture is the fact that next year will see a massive leadership change, with – in all likelihood – seven of the nine on the Politburo Standing Committee being replaced. New to power, these leaders will have to expend significant time and resources enhancing their powerbases and forging factional alliances – resources and time that could be spent on pushing reforms. Furthermore, they will no doubt have slightly different opinions from the current Standing Committee on what the priorities should be.

Second, even if there is strong political will and the necessary political power to enact reforms, economic realities – both at home and abroad – will make things tricky. For example, one significant factor behind the investment-heavy growth model and high corporate savings rate is suppressed interest rates, which pay too little to households for their savings and charge too little to state-owned enterprises for their borrowings. Indeed, SOEs actually lose money when taking this fact into account. However, raising interest rates would have a significant impact on the wobbly property market, local government debt levels, and would attract more 'hot money' from abroad, creating more pressure for faster exchange rate appreciation. So it's all easier said than done.

The bottom line is: it’s encouraging to see the government pushing in this direction, but it’s far from certain that they’ll be able to muster sufficient resources to meet the challenge.